​Apple needs to cross one last hurdle if it wants to make iPhones in India

At that point, no one in their right mind thought that Apple would actually think of decamping for Indian shores.

CNET/CBS Interactive

A few days ago, there was a lot of attention given to the revelation, which an Indian minister from the southern state of Karnataka tweeted, that Apple would soon start manufacturing the iPhone at a location (owned by Apple partner Wistron) in the state’s biggest city often referred to as the Silicon Valley of India, Bangalore (also called Bengaluru).

This news was predictably received with joy and pride by Indians and government ministers who have longed to see the country climb the manufacturing value chain and rival their far more accomplished neighbor China. There is no better marker that they have begun to do so than a decision by the most premium phone maker in the world to begin using India as a manufacturing base.

However, it now seems that this disclosure may turn out to be premature. A few days ago, India’s revenue secretary dropped this bombshell: “There is no way we can give individual exemptions under GST regime,” revenue secretary Hasmukh Adhia told ET. “All of them (CVD exemptions) will go.”

What Adhia is referring to is the not-so-small matter of Countervailing Duties or CVDs — an import duty levied on electronic components shipped in to the country that especially affects smartphone makers. Components used in mobile phones had been exempted from this kind of levy under the WTO Information Technology Agreement (amounting to 12.5 percent of the good) for the past several years — until last year, when the country ordained bringing back three items from the list to be charged accordingly in order to bolster the fortunes of local manufacturing under its ‘Make in India’ initiative.

At that point, no one in their right mind thought that Apple would actually think of decamping for Indian shores. Therefore, the pressing agenda was to try and boost the fortunes or domestic manufacturers as much as possible, a decision that they are probably now ruing. Fact is, component and labour costs have increased to such an extent in China that its neighbor is increasingly becoming more attractive despite India’s infrastructure deficiencies.

In fact, as I mentioned in this previous story, Apple is not the only one inspired to move here. At least half-a-dozen Chinese phone manufacturers have already opted for India as a manufacturing base that spins out phones for the Indian market, something that has also helped propel them to corner over 50 percent of the domestic market at the expense of Indian companies like Micromax, Lava and Korean giant Samsung.

The problem regarding “exemptions” that revenue secretary Adhia is referring to in his above statement is the fact that India is quickly migrating to a new tax regime in the upcoming financial year — specifically called a “Goods and Services Tax (GST)”. It is an all-encompassing levy that does away with the dizzying array of ones at the state and central level that have existed till now. In other words, the GST will now subsume all other taxes and duties including the CVD.

Here’s where the nub of the issue lies: In the past, the central government would have been able to give Apple a 15-year exemption on this duty — something that the US company has said that they will absolutely have to be given in order to manufacture here, and which the company is not flexible about. “They want predictability and certainty in tax regime as any mid-term tax shock can topple all their financial calculations,” said one official in explaining Apple’s conditionality. This is compounded by the fact that the company’s component manufacturers are not as yet willing to set up shop in the country.

Yet, almost overnight, that exemption is not the central government’s to give. The new body responsible for determining who gets what exemptions, if at all any, is the GST Council (comprised of the finance ministers of all of the Indian states and headed by the country’s finance minister), and they have currently appointed a host of central and state government officials to investigate and decide which goods deserve an exemption and which don’t.

The problem here is that if Apple gets an exemption, you can bet your bottom Rupee (or in this case Renminbi) that every other smartphone maker that is now a “low-cost” one will be clamouring for the same exemption. The Center meanwhile will have to do a lot of arm-twisting to the various state ministers to provide this exemption on grounds that it is in the best interests of the country.

“No Ministry has taken a final view on the submissions made by Apple. We are in touch with them (the Ministries). If the government decides to listen to particular demands, it would be for the good of the entire sector and the measures will be extended to all and not just the company (Apple),” said Department of Industrial Policy and Promotion Secretary Ramesh Abhishek at a news conference on Monday.

The company has also asked for easing of conditions that have to do with labeling as well as the mandatory domestic sourcing norm for one-third of inputs used, which was denied to them last year. No doubt its competitors will be watching action on these fronts keenly.

There is one trump card that the central government could play: Today, electronic manufacturers receive benefits under the Modified Special Incentive Package Scheme (MSIPS) that was put in place years ago to attract foreign investment in the electronics sector. The scheme provides capital subsidy and reimbursements for things like CVD and excise on capital equipment to boost manufacturing of electronics in the country. There is some talk that in a last-ditch scenario the Central government will make an exception in Apple’s case, dubbing it an “advanced technology” product to meet the company’s requirements.

Until then, it’s a waiting game avidly watched by anyone connected to the government and the electronics industry in India — not to mention Apple.